<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                   FORM 10-QSB

   [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999

                                       OR

   [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM _____ TO _____

                         Commission file number 0-24871

                               Fatbrain.com, Inc.
        (Exact name of small business issuer as specified in its charter)

                DELAWARE                               77-0389480
            (State or other                         (I.R.S. Employer
            jurisdiction of                       Identification Number)
            incorporation or
             organization)

                                2550 WALSH AVENUE
                          SANTA CLARA, CALIFORNIA 95051
                    (Address of principal executive offices)

                             ----------------------

                                 (408) 845-0100
                (Issuer's telephone number, including area code)

                             ----------------------

        Indicate by check [X] whether the issuer (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
   1934 during the past 12 months (or for such shorter period that the
   registrant was required to file such reports), and (2) has been subject to
   such filing requirements for the past 90 days

             (1)        Yes  [X]                 No  [ ]

             (2)        Yes  [X]                 No  [ ]

        As of October 31, 1999 there were 11,414,848 shares of the Registrant's
common stock outstanding.

================================================================================

<PAGE>   2


                               FATBRAIN.COM, INC.

                                   FORM 10-QSB

                                      INDEX

<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           ----
<S>        <C>                                                                             <C>
PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

           Condensed Balance Sheets at January 31, 1999 and October 31, 1999...............   3

           Condensed Statements of Operations and Comprehensive Loss for the
           three and nine months ended October 31, 1998 and October 31, 1999 ..............   4

           Condensed Statements of Cash Flows for the three and nine months
           ended October 31, 1998 and October 31, 1999.....................................   5

           Notes to Condensed Financial Statements.........................................   6

Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations...........................................................   8

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings...............................................................  24

Item 2.    Changes in Securities and Use of Proceeds.......................................  24

Item 3.    Defaults upon Senior Securities.................................................  24

Item 4.    Submission of Matters to a Vote of Security Holders.............................  24

Item 5.    Other Information...............................................................  24

Item 6.    Exhibits and Reports on Form 8-K................................................  24

SIGNATURES.................................................................................  25
</TABLE>



                                       2
<PAGE>   3



PART I.       FINANCIAL INFORMATION
Item 1.       Financial Statements.

                               FATBRAIN.COM, INC.
                            CONDENSED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      January 31,          October 31,
                                                                         1999                 1999
                                                                      ----------           ----------
                                                                                           (unaudited)
<S>                                                                   <C>                  <C>
ASSETS
Current assets:
    Cash and equivalents                                              $    9,341           $    1,117
    Short-term investments                                                 5,344                   --
    Accounts receivable, net of allowance of $161 and $354                 1,268                2,813
    Inventories                                                            3,204                6,777
    Prepaid expenses and other current assets                              1,068                1,544
                                                                      ----------           ----------
      Total current assets                                                20,225               12,251

Property and equipment, net                                                2,097                9,301
Investments                                                               14,181                5,608
Goodwill, net                                                              2,751                2,597
Other assets                                                                 360                  320
                                                                      ----------           ----------
      Total assets                                                    $   39,614           $   30,077
                                                                      ==========           ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                  $    1,896           $    8,826
    Accrued expenses                                                       1,169                2,439
    Current portion of capital lease obligations                              18                   18
                                                                      ----------           ----------
      Total current liabilities                                            3,083               11,283
Line of credit                                                                --                2,000
Capital lease obligations                                                     35                   21
                                                                      ----------           ----------
      Total liabilities                                                    3,118               13,304
Stockholders' equity:
    Preferred stock, $0.001 par value, 5,000 authorized,
      none issued and outstanding                                             --                   --
    Common stock, $0.001 par value, 50,000 and 50,000
      shares authorized, 11,172 and 11,415 shares issued and
      outstanding at January 31, 1999 and October 31, 1999,
      respectively                                                            11                   11
    Additional paid-in capital                                            50,270               50,704
    Warrants                                                                  12                  127
    Unrealized loss on investments                                           (47)                 (36)
    Accumulated deficit                                                  (13,750)             (34,033)
                                                                      ----------           ----------
      Total stockholders' equity                                          36,496               16,773
                                                                      ----------           ----------
      Total liabilities and stockholders' equity                      $   39,614           $   30,077
                                                                      ==========           ==========
</TABLE>

            See accompanying notes to condensed financial statements.


                                       3
<PAGE>   4

                               FATBRAIN.COM, INC.
            CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                   Three months ended                Nine months ended
                                                                       October 31,                       October 31,
                                                               ---------------------------      ---------------------------
                                                                 1998              1999           1998              1999
                                                               ----------       ----------      ----------       ----------
                                                                       (unaudited)                      (unaudited)
<S>                                                            <C>              <C>             <C>              <C>
Revenues:
      Online                                                   $    2,934       $    8,248      $    7,159       $   18,524
      Retail and other                                              2,296            1,731           7,280            4,960
                                                               ----------       ----------      ----------       ----------
         Total revenues                                             5,230            9,979          14,439           23,484
Cost of revenues:
      Online                                                        2,347            6,795           5,638           14,967
      Retail and other                                              1,501            1,124           4,727            3,228
                                                               ----------       ----------      ----------       ----------
         Total cost of revenues                                     3,848            7,919          10,365           18,195
                                                               ----------       ----------      ----------       ----------
Gross profit                                                        1,382            2,060           4,074            5,289
Operating expenses:
      Sales and marketing                                           2,759            7,505           6,815           17,441
      Development and engineering                                     763            1,830           1,911            4,249
      General and administrative                                      799            1,959           2,023            4,477
                                                               ----------       ----------      ----------       ----------
         Total operating expenses                                   4,321           11,294          10,749           26,167
                                                               ----------       ----------      ----------       ----------
Loss from operations                                               (2,939)          (9,234)         (6,675)         (20,878)
Interest, net                                                          45               89             144              595
                                                               ----------       ----------      ----------       ----------
Net loss                                                           (2,894)          (9,145)         (6,531)         (20,283)
Other comprehensive income - unrealized gain on investments            --               28              --               11
                                                               ----------       ----------      ----------       ----------
Comprehensive loss                                             $   (2,894)      $   (9,117)     $   (6,531)      $  (20,272)
                                                               ==========       ==========      ==========       ==========
Basic and diluted net loss per share                           $    (1.84)      $    (0.80)     $    (4.22)      $    (1.79)
                                                               ==========       ==========      ==========       ==========
Shares used in calculating basic and diluted
    net loss per share                                              1,571           11,378           1,546           11,301
                                                               ==========       ==========      ==========       ==========
</TABLE>

                  See accompanying notes to condensed financial statements.


                                       4
<PAGE>   5

                               FATBRAIN.COM, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      Three months ended               Nine months ended
                                                                           October 31,                      October 31,
                                                                  ---------------------------       ---------------------------
                                                                     1998             1999             1998             1999
                                                                  ----------       ----------       ----------       ----------
                                                                          (unaudited)                       (unaudited)
<S>                                                               <C>              <C>              <C>              <C>
Cash flows from operating activities:
   Net loss                                                       $   (2,894)      $   (9,145)      $   (6,531)      $  (20,283)
   Adjustments to reconcile net loss to net cash used in
     operations:
      Depreciation and amortization                                      183              392              415              908
      Options granted to consultants                                      --              115                5              115
      Amortization of premium on investments                              --               69               --              262
   Changes in current assets and liabilities:
      Accounts receivable                                               (259)          (1,061)            (617)          (1,545)
      Inventories                                                       (117)            (906)            (413)          (3,573)
      Prepaid expenses and other assets                                 (237)               8             (850)            (470)
      Accounts payable                                                    11            4,370              (31)           6,930
      Accrued expenses                                                   477            1,098              390            1,270
                                                                  ----------       ----------       ----------       ----------
      Net cash used in operations                                     (2,836)          (5,060)          (7,632)         (16,386)

Cash flows from investing activities:
      Purchase of property and equipment                                (216)          (3,931)            (861)          (7,924)
      Sale of investments                                                 --            4,873               --           13,666
                                                                  ----------       ----------       ----------       ----------
      Net cash (used in)/provided by investing activities               (216)             942             (861)           5,742

Cash flows from financing activities:
      Repayment of capital lease obligation                               (4)              (6)             (13)             (14)
      Borrowings under line of credit                                     --            2,000               --            2,000
      Proceeds from issuance of preferred stock, net                      --               --            5,524               --
      Net proceeds from exercise of stock options and warrants             9              120               93              207
      Proceeds from employee stock plan purchases                         --               --               --              227
                                                                  ----------       ----------       ----------       ----------
      Net cash provided by financing activities                            5            2,114            5,604            2,420
                                                                  ----------       ----------       ----------       ----------

Net increase (decrease) in cash and equivalents:                      (3,047)          (2,004)          (2,889)          (8,224)
      Cash and equivalents at beginning of period                      5,132            3,121            4,974            9,341
                                                                  ----------       ----------       ----------       ----------
      Cash and equivalents at end of period                       $    2,085       $    1,117       $    2,085       $    1,117
                                                                  ==========       ==========       ==========       ==========

Non-cash investing activity:
      Unrealized gain on investments                                      --               28               --               11
Supplemental disclosure of cash flow information:
      Cash paid for interest                                               2               --                5                4
      Cash paid for income tax                                            --               --               --               --
</TABLE>


            See accompanying notes to condensed financial statements.


                                       5
<PAGE>   6


                               FATBRAIN.COM, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

     1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

        Description of Business and Basis of Presentation

               Fatbrain.com, Inc., formerly Computer Literacy, Inc., (the
        "Company") was incorporated in California in November 1994 and
        reincorporated in Delaware in May 1998. The Company is an online
        retailer of professional books, technology based training solutions,
        corporate documentation and other information resources, all of which
        are targeted to business and technical professionals. In addition, in
        October 1999 the Company introduced eMatter, a secure digital publishing
        channel to allow authors and publishers to publish and sell works
        online. Business is transacted through the Company's online store or
        through its two physical retail locations.

        Unaudited Interim Financial Information

               The condensed financial statements of Fatbrain.com, Inc. included
        herein are unaudited and reflect all adjustments (consisting only of
        normal recurring adjustments) which are, in the opinion of management,
        necessary for a fair presentation of the financial position and
        operating results for the three and nine months ended October 31, 1998
        and October 31, 1999. These financial statements should be read in
        conjunction with the Company's audited financial statements as of
        January 31, 1999 and for the year then ended and notes thereto included
        in the Company's April 16, 1999 filing on Form 10-KSB. The results of
        operations for the three and nine months ended October 31, 1999 are not
        necessarily indicative of the results to be expected for any subsequent
        quarter or for the year ending January 31, 2000.

     2. SEGMENT INFORMATION

               On January 31, 1999, the Company adopted SFAS No. 131,
        "Disclosures About Segments of an Enterprise and Related Information,"
        which established standards for reporting information about operating
        segments in annual financial statements, along with related disclosures
        about products and services, geographic areas, and major customers. The
        information for the three and nine months ended October 31, 1998 has
        been reclassified from the prior year's presentation to conform to the
        presentation for the three and nine months ended October 31, 1999.

               Operating segments are defined as components of an enterprise
        about which separate financial information is available that is
        evaluated regularly by the Company's chief operating decision maker. By
        this definition, Fatbrain.com has three operating segments: internet
        commerce, retail stores, and online advertising. The segments presented
        here are those that were presented in the Company's filing on form
        10-KSB for the year ended January 31, 1999, with the addition of the
        online advertising segment. These segments are differentiated based upon
        one of two criteria: the methods used to distribute product, or the
        nature of the product or service provided. For the internet commerce
        segment, products are ordered via the Company's web site and mailed
        directly to the customer through the Company's distribution system. The
        retail stores maintain inventory within the store in a traditional
        retail environment. These operating segments had similar product
        offerings in the three and nine months ended October 31, 1998 and in the
        three and nine months ended October 31, 1999. The online advertising
        segment generates revenue through the sale of advertising space on the
        Company's website. The Company began generating online advertising
        revenues in the quarter ended April 30, 1999. The Company had no online
        advertising revenue in the three months ended October 31, 1999.
        Unallocated revenues are generated primarily from trade shows and book
        fairs.


                                       6
<PAGE>   7

SEGMENT CONTRIBUTION

<TABLE>
<CAPTION>
                                        Three months ended                 Nine months ended
                                             October 31,                       October 31,
                                     ---------------------------       ---------------------------
                                        1998               1999           1998              1999
                                     ----------       ----------       ----------       ----------
                                           (in thousands)                    (in thousands)
<S>                                  <C>              <C>              <C>              <C>
Revenues (1):
  Internet commerce                  $    2,934       $    8,248       $    7,159       $   18,079
  Retail stores                           2,252            1,711            7,225            4,906
  Online advertising                         --               --               --              445
  Unallocated                                44               20               55               54
                                     ----------       ----------       ----------       ----------
     Consolidated net revenues            5,230            9,979           14,439           23,484

Gross profit (1):
  Internet commerce                         587            1,453            1,521            3,112
  Retail stores                             782              604            2,550            1,717
  Online advertising                         --               --               --              445
  Unallocated                                13                3                3               15
                                     ----------       ----------       ----------       ----------
      Consolidated margin                 1,382            2,060            4,074            5,289

Contribution (2):
  Internet commerce                        (103)          (2,098)            (125)          (3,180)
  Retail stores                             157              190              654              489
  Online advertising                         --               --               --              445
  Unallocated                                 4               (3)              (8)             (15)
                                     ----------       ----------       ----------       ----------
      Consolidated contribution      $       58       $   (1,911)      $      521       $   (2,261)
                                     ==========       ==========       ==========       ==========
</TABLE>

-------------
(1)  The presentation of revenues and gross profit is consistent with the
     Company's internal presentation of financial information to management.
(2)  Contribution is defined as gross profit, less direct operating expenses.

RECONCILIATION OF CONTRIBUTION TO NET LOSS

<TABLE>
<S>                                  <C>              <C>              <C>              <C>

Consolidated Contribution            $       58       $   (1,911)      $      521       $   (2,261)
Interest income, net                         45               89              144              595
Indirect expenses                        (2,997)          (7,323)          (7,196)         (18,617)
                                     ----------       ----------       ----------       ----------
Net loss                             $   (2,894)      $   (9,145)      $   (6,531)      $  (20,283)
                                     ==========       ==========       ==========       ==========
</TABLE>

        The Company evaluates segment performance based on gross profit. The
Company does not analyze the segments individually below the gross profit line.
Direct operating expenses are those directly related to the operating segment
(for example, direct salaries, rent, etc.) and exclude all corporate overhead
expenses. Segment assets are not presented as all assets of the Company are
commingled and are not available by segment. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.

        Geographic information. International sales, measured as shipments to
addresses outside the United States were 11% of total revenues for both the
three and nine month periods ended October 31, 1998 and 9% and 11%,
respectively, of total revenues for the three and nine month periods ended
October 31, 1999. No foreign country or geographical area accounted for more
than 10% of revenue in any of the periods presented.

        Major customers. No individual customer accounted for 10% or more of the
Company's consolidated revenues for the three and nine months ended October 31,
1998 and October 31, 1999.


                                       7
<PAGE>   8


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

        The following discussion and analysis of financial conditions and
results of operations contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Risk Factors That May Affect Future
Results" as well as those discussed in this section and elsewhere in this
Report. The information included in this report should be read in conjunction
with the information included in the Company's 1999 Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.

OVERVIEW

        Fatbrain.com, Inc. is the leading online retailer of information
resources singularly focused on technical and business professionals. With over
300,000 information resource titles from more than 8,000 publishers, we offer
our customers online access to a broad and comprehensive selection of technical
and professional books, technology based training solutions, corporate
documentation and other information resources. We recently introduced eMatter,
the first secure digital publishing solution that allows authors and publishers
to publish and sell their works online, providing a new global distribution
channel for works of all kinds, including books, magazines and articles. In
addition to our extensive product offering, our online store features
authoritative and compelling content, competitive pricing, an easy-to-use
navigational interface and a variety of value-added services. We also operate
two physical retail stores that complement our online business by generating
increased online traffic and creating cross-promotional opportunities.

        We were incorporated in November 1994 as Computer Literacy Corporation
and began selling technical books in February 1996, technology based training
solutions in January 1998, corporate documentation in May 1998, and professional
resources for the engineering, science, mathematics and financial services
industries in March 1999. In October 1999 we began offering eMatter at our
online store. We generate revenues from sale of our products through our online
store, certain co-branded corporate online stores and our two retail locations
as well as through trade shows and book fairs. We recognize revenue from our
online store upon shipment and, from our physical retail stores, trade shows and
book fairs, at the time of sale. In the nine month period ended October 31,
1999, we generated additional revenue by selling advertising space on our web
site.

        Cost of revenues includes costs of products and inbound and outbound
freight. These costs may vary as a percentage of total revenues in any given
period due to a number of factors, including increased price competition, varied
levels of cooperative advertising dollars received from certain publishers of
books, changes in the size and timing of discounts and other promotional
activities, and changes in product mix. For the three month period ended October
31, 1998 and October 31, 1999, we purchased approximately 29% and 34%,
respectively, of our books from Ingram Book Company ("Ingram"), an indirect
reseller. In the nine month period ended October 31, 1998 and October 31, 1999
we purchased approximately 31% and 36% respectively, of our books from Ingram.
Although the primary advantage associated with purchasing from Ingram is just in
time inventory management, we believe we will make a larger number of our
purchases directly from publishers as our sales volume increases, thereby
enabling us to take advantage of favorable volume discounts. For the three and
nine month periods ended October 31, 1999 we purchased approximately 19% and
18%, respectively, of our books from Pearson Education Division.

        Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future.
There can be no assurance that we will achieve profitability or that, if
profitability is achieved, it will be sustained. As of October 31, 1999 we had
an accumulated deficit of $34.0 million. We believe that our success will depend
in large part on our ability to enhance our customers' online shopping
experience, expand corporate relationships, build Fatbrain and eMatter brand
awareness, encourage customer loyalty, capitalize on the market for information
resources, establish and leverage supplier relationships, maintain our technical
focus and expand our expertise in the engineering, science, mathematics and
financial services industries. Accordingly, we intend to invest heavily in
marketing and promotion, our direct sales and telesales organizations, and
infrastructure development. There can be no assurance that such expenditures
will result in increased revenues or customer growth. Additionally, while in
recent periods we have experienced significant growth in revenues, our customer
base and repeat customer revenue, such growth rates are not sustainable, will
decrease in the future and are not indicative of actual growth rates that we may
experience in future periods. In view of the rapidly evolving nature


                                       8
<PAGE>   9




of our business and our limited operating history, we believe that
period-to-period comparisons of our operating results, including our operating
expenses as a percentage of total revenues, are not necessarily meaningful and
should not be relied upon as an indication of future performance. See "Risk
Factors -- Limited Operating History; Accumulated Deficit; Anticipated Losses."

RESULTS OF OPERATIONS

        The following table presents the Company's results of operations as a
percentage of total revenues for the periods indicated.

<TABLE>
<CAPTION>
                                              Quarter ended                   Nine months ended
                                               October 31,                        October 31,
                                          ----------------------            ----------------------
                                          1998             1999             1998             1999
                                          -----            -----            -----            -----
<S>                                       <C>              <C>              <C>              <C>
Revenues:
      Online                               56.1%            82.7%            49.6%            78.9%
      Retail and other                     43.9             17.3             50.4             21.1
                                          -----            -----            -----            -----
         Total revenues                   100.0            100.0            100.0            100.0
Cost of revenues (1):
      Online                               80.0             82.4             78.8             80.8
      Retail and other                     65.4             64.9             64.9             65.1
                                          -----            -----            -----            -----
         Total cost of revenues            73.6             79.4             71.8             77.5
                                          -----            -----            -----            -----
Gross profit                               26.4             20.6             28.2             22.5
Operating expenses:
      Sales and marketing                  52.7             75.2             47.2             74.3
      Development and engineering          14.6             18.3             13.2             18.1
      General and administrative           15.3             19.6             14.0             19.0
                                          -----            -----            -----            -----
         Total operating expenses          82.6            113.1             74.4            111.4
                                          -----            -----            -----            -----
    Loss from operations                  (56.2)           (92.5)           (46.2)           (88.9)
    Interest, net                           0.9              0.9              1.0              2.5
                                          -----            -----            -----            -----
    Net loss                              (55.3%)          (91.6%)          (45.2%)          (86.4%)
                                          =====            =====            =====            =====
</TABLE>

-------------
(1)  Cost of online revenue and cost of retail and other revenue are shown as a
     percentage of related online revenue and retail and other revenue,
     respectively.

THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1999

        Online Revenue. Online revenue is comprised of revenue from online sales
of information resources, associated outbound shipping charges, net of returns
and, to a lesser extent, the sale of advertising space on our web site. Online
revenue increased from $2.9 million, or 56.1% of total revenues in the three
months ended October 31, 1998, to $8.2 million, or 82.7% of total revenues in
the three months ended October 31, 1999 primarily as a result of significant
increases in our customer base (from 58,576 to 188,830), and repeat purchases
from our existing customers.

        International sales represented approximately 20% and 11% of online
revenue for the three months ended October 31, 1998 and the three months ended
October 31, 1999, respectively.

        Retail and Other Revenue. Retail and other revenue is comprised
primarily of revenue generated by our physical retail stores and, to a lesser
extent, by trade shows and book fairs. Retail and other revenue decreased from
$2.3 million, or 43.9% of total revenues for the three months ended October 31,
1998, to $1.7 million, or 17.3% of total revenues in the three months ended
October 31, 1999, primarily as a result of an increased focus of our sales and
marketing on the online business, as well as the closure of two retail stores,
located in Cupertino, California and Vienna, Virginia, at the end of fiscal
1999. The Company periodically evaluates the location and productivity of its
retail stores and may close, consolidate or relocate stores as conditions
warrant. Any closure, consolidation or relocation of a retail store is likely to
decrease retail and other revenue.

        Cost of Online Revenue. Cost of online revenue is comprised primarily of
the cost of merchandise sold through our online store and associated inbound and
outbound shipping costs. Cost of online revenue increased from


                                       9
<PAGE>   10




$2.3 million, or 80.0% of online revenue for the three months ended October 31,
1998, to $6.8 million, or 82.4% of online revenue in the three months ended
October 31, 1999. The increase in absolute dollars was attributable to increased
online sales volume.

        Cost of Retail and Other Revenue. Cost of retail and other revenue is
comprised of the cost of merchandise sold through our retail stores and at trade
shows and book fairs and includes associated inbound shipping costs. Cost of
retail and other revenue decreased from $1.5 million, or 65.4% of retail and
other revenue in the three months ended October 31, 1998, to $1.1 million, or
64.9% of retail and other revenue in the three months ended October 31, 1999
primarily as a result of the decrease in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 26.4% in the three months ended October 31, 1998 to 20.6% in the three
months ended October 31, 1999. The percentage decrease was primarily a result of
the increase in online sales as a percent of total revenues, as well as our
online competitive pricing policy and discounted shipping offerings. We have
offered, and expect to continue to offer in the foreseeable future, discounts on
various product offerings and on outbound shipping to encourage new customers
and online traffic. Such pricing pressure is likely to reduce gross margins in
the future but may be partially offset by the change in mix of products sold
towards higher margin technology based training materials and corporate
documentation.

        Sales and Marketing Expenses. Sales and marketing expenses consist of
advertising, promotional and public relations expenditures, payroll and related
expenses for personnel engaged in corporate sales, marketing and fulfillment, as
well as direct expenses associated with our retail stores,. Sales and marketing
expenses increased from $2.8 million, or 52.7% of total revenues in the three
months ended October 31, 1998, to $7.5 million, or 75.2% of total revenues in
the three months ended October 31, 1999. The increase in absolute dollars was
primarily attributable to the expansion of our online store and its direct sales
force, plus an increase in advertising, branding, public relations and other
promotional expenditures to support our introduction of eMatter and the
continued development of the Fatbrain.com brand. The increase was also due to
the increased personnel and related expenses required to implement our marketing
strategy and fulfill customer demand. We intend to continue to pursue aggressive
branding, marketing and telesales campaigns and enhance our corporate sales
force to generate increased online traffic and acquire customers. Accordingly,
we expects sales and marketing expenses to increase in absolute dollars for the
foreseeable future, but decrease as a percentage of total revenues as total
revenues increase.

        Development and Engineering Expenses. Development and engineering
expenses primarily consist of costs associated with systems and
telecommunications infrastructure, as well as editorial operations. Development
and engineering expenses increased from $763,000, or 14.6% of total revenues in
the three months ended October 31, 1998, to $1.8 million, or 18.3% of total
revenues in the three months ended October 31, 1999. The increase in absolute
dollars was primarily attributable to increased staffing and associated costs
related to enhancing the features, content and functionality of our online store
and transaction-processing systems, as well as increased investments in systems
and telecommunications infrastructure. Additionally, we incurred significant
costs associated with the development and introduction of eMatter due to both
increased staffing and systems infrastruture costs. To date, all development and
engineering costs have been expensed as incurred. We believe that continued
investment in systems and infrastructure development is critical to attaining
our strategic objectives and, as a result, expect development and engineering
expenses to increase significantly in absolute dollars for the foreseeable
future, but decrease as a percentage of total revenues as total revenues
increase.

        General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$799,000, or 15.3% of total revenues in the three months ended October 31, 1998,
to $2.0 million or 19.6% of total revenues in the three months ended October 31,
1999. This increase in absolute dollars was primarily due to increased salaries
and related expenses associated with the hiring of additional personnel and
increases in facilities related costs associated with our move to a new larger
facility in July 1999. We expect general and administrative expenses to increase
in absolute dollars as we expand our staff and incur additional costs related to
the expansion of our business, but decrease as a percentage of total revenues as
total revenues increase.

        Interest, Net. Net interest income increased from $45,000 in the three
months ended October 31, 1998, to $89,000 in the three months ended October 31,
1999 due to greater cash and investment balances on hand.


                                       10
<PAGE>   11





NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1999

        Online Revenue. Online revenue increased from $7.2 million, or 49.6% of
total revenues in the nine months ended October 31, 1998, to $18.5 million, or
78.9% of total revenues in the nine months ended October 31, 1999 primarily as a
result of significant increases in our customer base (from 58,576 to 188,830),
and repeat purchases from our existing customers.

        International sales represented approximately 22% and 13% of online
revenue for the nine months ended October 31, 1998 and the nine months ended
October 31, 1999, respectively.

        Retail and Other Revenue. Retail and other revenue decreased from $7.3
million, or 50.4% of total revenues for the nine months ended October 31, 1998,
to $5.0 million, or 21.1% of total revenues in the nine months ended October 31,
1999 primarily as a result of an increased focus of our sales and marketing on
the online business, as well as the closure of two retail stores, located in
Cupertino, California and Vienna, Virginia, at the end of fiscal 1999.

        Cost of Online Revenue. Cost of online revenue increased from $5.6
million, or 78.8% of online revenue for the nine months ended October 31, 1998,
to $15.0 million, or 80.8% of online revenue in the nine months ended October
31, 1999. The increase in absolute dollars was attributable to increased online
sales volume.

        Cost of Retail and Other Revenue. Cost of retail and other revenue
decreased from $4.7 million, or 64.9% of retail and other revenue in the nine
months ended October 31, 1998, to $3.2 million, or 65.1% of retail and other
revenue in the nine months ended October 31, 1999 primarily as a result of the
decrease in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 28.2% in the nine months ended October 31, 1998 to 22.5% in the nine months
ended October 31, 1999 as the higher margin retail and other revenue represented
a smaller portion of total revenue.

        Sales and Marketing Expenses. Sales and marketing expenses increased
from $6.8 million, or 47.2% of total revenues in the nine months ended October
31, 1998, to $17.4 million, or 74.3% of total revenues in the nine months ended
October 31, 1999. The increase in absolute dollars was primarily attributable to
the expansion of our online store and its direct sales force, plus an increase
in advertising, branding, public relations and other promotional expenditures to
support our name change and the introduction of eMatter. The increase was also
due to the increased personnel and related expenses required to implement our
marketing strategy and fulfill customer demand.

        Development and Engineering Expenses. Development and engineering
expenses increased from $1.9 million, or 13.2% of total revenues in the nine
months ended October 31, 1998, to $4.2 million, or 18.1% of total revenues in
the nine months ended October 31, 1999. The increase in absolute dollars was
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of our online store and
transaction-processing systems, increased investments in systems and
telecommunications infrastructure, and investment in the development and
introduction of eMatter.

        General and Administrative Expenses. General and administrative expenses
increased from $2.0 million, or 14.0% of total revenues in the nine months ended
October 31, 1998, to $4.5 million or 19.0% of total revenues in the nine months
ended October 31, 1999. This increase in absolute dollars was primarily due to
increased salaries and related expenses associated with the hiring of additional
personnel, increases in professional fees and increases in facilities related
costs.

        Interest, Net. Net interest income increased from $144,000 in the nine
months ended October 31, 1998, to $595,000 in the nine months ended October 31,
1999 due to greater cash and investment balances on hand from the remaining
proceeds of our initial public offering in November 1998.

LIQUIDITY AND CAPITAL RESOURCES


                                       11
<PAGE>   12



        Since inception, we have financed our operations primarily through
private sales of preferred stock which totaled approximately $19.3 million net
of issuance costs, and public sale of common stock in our initial public
offering in November 1998 which totaled approximately $30.8 million net of
issuance costs.

        Net cash used in operating activities was $2.8 million in the three
months ended October 31, 1998 and $5.1 million in the three months ended October
31, 1999. Cash used in operating activities in the three months ended October
31, 1998 was primarily attributable to a net loss of $2.9 million and increases
of $259,000, $117,000 and $237,000, respectively, in accounts receivable,
inventories and prepaid expenses and other assets, partially offset by an
increase of $477,000 in accrued expenses, as well as depreciation and
amortization. For the three months ended October 31, 1999, cash used in
operating activities primarily resulted from a net loss of $9.1 million plus
increases of $1.1 million and $906,000, respectively, in accounts receivable and
inventories, partially offset by an increase in accounts payable and accrued
expenses of $5.5 million, as well as depreciation and amortization.

        Net cash used in operating activities was $7.6 million in the nine
months ended October 31, 1998 and $16.4 million in the nine months ended October
31, 1999. Cash used in operating activities in the nine months ended October 31,
1998 was primarily attributable to a net loss of $6.5 million and increases of
$617,000, $413,000 and $850,000, respectively, in accounts receivable,
inventories and prepaid expenses and other assets, partially offset by
depreciation and amortization. For the nine months ended October 31, 1999, cash
used in operating activities primarily resulted from a net loss of $20.3 million
plus increases of $1.5 million, $3.6 million and $470,000, respectively, in
accounts receivable, inventories, and prepaid expenses and other current assets,
partially offset by an $8.2 million increase in accounts payable and accrued
expenses, as well as depreciation and amortization.

        Net cash used in investing activities was $216,000 in the three months
ended October 31, 1998, and was attributable to purchases of property and
equipment. Net cash provided by investing activities was $942,000 in the three
months ended October 31, 1999 and was attributable to $4.9 million in sales of
investments, offset by $3.9 million used to purchase property and equipment. Net
cash used in investing activities was $861,000 in the nine months ended October
31, 1998, and was attributable to purchases of property and equipment. Net cash
provided by investing activities was $5.7 million in the nine months ended
October 31, 1999 and was attributable to $13.7 million in sales of investments,
offset by $7.9 million used to purchase property and equipment.

        Cash provided by financing activities was $5,000 in the three months
ended October 31, 1998. Cash provided by financing activities was $2.1 million
in the three months ended October 31, 1999 and was due primarily to $2.0 million
in borrowings under our line of credit, as well as stock option and warrant
exercises. Cash provided by financing activities was $5.6 million in the nine
months ended October 31, 1999 and was primarily due to $5.5 million in proceeds
from the issuance of preferred stock. Cash provided by financing activities was
$2.4 million in the nine months ended October 31, 1999. We have a $4.0 million
line of credit which expires on December 31, 1999. As of October 31, 1999, we
had $2.0 million outstanding under our line of credit.

        As of October 31, 1999 we had $1.1 million of cash and equivalents and
$5.6 million of investments. As of that date, our principal commitments
consisted of obligations outstanding under an agreement with CBT Systems, Ltd.
and operating and capital leases. Although we have no material long-term
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel.

        In November 1999 we closed a $30 million round of financing with Vulcan
Ventures, Incorporated and Highland Capital Partners in exchange for 1,437,470
shares of common stock and a warrant to purchase 431,241 shares of common stock.
We intend to register these shares on a Form S-3 registration statement in
December 1999.

        RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

        We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. The following discussion highlights
some of these risks. These risks should be read in conjunction with the "Risk
Factors" section information included in the Company's 1999 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES


                                       12
<PAGE>   13





        We were incorporated in November 1994 to develop an online retail
strategy and we began selling information resources, initially consisting of
technical books, through our online store on the World Wide Web (the "Web") in
February 1996. We expanded our product offerings to include training materials
in January 1998, corporate documentation in May 1998 and professional resources
for the engineering, science, mathematics and financial services industries in
March 1999. We introduced eMatter, a secure digital publishing channel to allow
authors and publishers to publish and sell works online, in October 1999.
Accordingly, we have a very limited operating history from which to evaluate our
business and prospects.

        Our prospects must be considered in light of the risks, expenses and
uncertainties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks for us may include:

          -    An evolving and unpredictable business model;
          -    Management of an expanding business;
          -    Fluctuations in sales;
          -    Seasonality;
          -    Entry into new business areas;
          -    Competition;
          -    Need for additional personnel and dependence on key personnel;
          -    Limitations on our ability to establish and expand our brand;
          -    Capacity constraints;
          -    Systems failures;
          -    Announcements by current or potential competitors;
          -    Changes in the needs of technical and business professionals; and
          -    The other Risk Factors discussed herein.

        To address these risks, we must, among other things:

          -    Implement and successfully execute our business and marketing
               strategy;
          -    Maintain and increase our customer base;
          -    Continue to develop and upgrade our technology and
               transaction-processing systems;
          -    Improve our online store;
          -    Provide superior customer service and order fulfillment;
          -    Respond to competitive developments; and
          -    Attract, retain and motivate qualified personnel.

        We may not be successful in addressing such risks, and the failure to do
so would seriously harm our business, financial condition, results of
operations, and cash flows.

        Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved, profitability may not be
sustained. As of October 31, 1999, we had an accumulated deficit of $34.0
million. We believe that our success will depend in large part on our ability
to:

          -    Enhance our customers' online shopping experience;
          -    Expand corporate relationships;
          -    Build brand awareness;
          -    Build eMatter awareness;
          -    Encourage customer loyalty;
          -    Capitalize on the market for information resources;
          -    Establish and utilize supplier relationships;
          -    Maintain our technology focus and expertise; and
          -    Expand our expertise in the engineering, science, mathematics and
               financial services industries.


                                       13
<PAGE>   14





        Accordingly, we intend to invest heavily in marketing and promotion, our
direct sales and telesales organizations, and systems and infrastructure
development. Such expenditures may not result in increased revenues or customer
growth. Additionally, while in recent periods we have experienced significant
growth in revenues, our customer base and repeat customer revenue, such growth
rates are not sustainable. Such growth rates will decrease in the future and are
not indicative of actual growth rates that we may experience.

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY

        We are unable to accurately forecast our future revenues because of our
limited operating history and the emerging nature of the markets in which we
compete. Revenues and operating results generally depend on the volume of,
timing of and ability to fulfill orders received. These factors have
historically been, and are likely to continue to be, difficult to forecast. Our
current and future expense levels are based largely on our operating plans and
estimates of future revenues and are, to a large extent, fixed. We may be unable
to adjust spending sufficiently quickly to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures would seriously harm our business, financial condition,
results of operations, and cash flows. Further, we may, from time to time, make
certain pricing, product, service or marketing decisions as a strategic response
to changes in the competitive environment. Such changes could seriously harm our
business, financial condition, results of operations, and cash flows.

        Our future quarterly operating results may vary significantly due to a
variety of factors, many of which are outside our control. Factors that could
affect our quarterly operating results include:

          -    Our ability to establish and expand brand awareness;
          -    Our ability to retain existing customers, attract new customers
               and continuously improve customer satisfaction;
          -    Announcements of, and market anticipation for, new technology
               offerings for which information resources may be sought;
          -    Our ability to manage inventory and fulfillment operations;
          -    Our ability to sustain or improve gross margin levels;
          -    The announcement or introduction of new online stores, services
               and products by us or our competitors;
          -    Price competition or higher wholesale prices in the industry;
          -    The level of usage of and commerce on the Internet and online
               services generally;
          -    Increasing customer acceptance of the Internet for the purchase
               of information resources such as those offered by us;
          -    Our ability to upgrade and develop our systems and infrastructure
               in a timely and effective manner;
          -    The level of traffic on our online store;
          -    The sales mix of our product offerings;
          -    Technical difficulties, system downtime or Internet brownouts;
          -    The amount and timing of operating costs and capital expenditures
               relating to expansion of our business, operations and
               infrastructure;
          -    The introduction of new product lines including eMatter;
          -    The level of merchandise returns we experience;
          -    Governmental regulation; and
          -    General economic conditions and economic conditions specific to
               the Internet, electronic commerce and the technical and
               professional resource industries.

        In the past, we have experienced seasonality in our business and we
expect that we will continue to experience such seasonality in the future.
Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December. During these
times many technical and business professionals are either absent from the
workplace, on vacation or experience a holiday closure at their company. Our
results in future quarters may be negatively affected by seasonal trends.


                                       14
<PAGE>   15





        Due to the foregoing factors, we cannot predict with any significant
degree of certainty our quarterly revenue and operating results. Further, we
believe that period-to-period comparisons of our operating results are not
necessarily a meaningful indication of future performance. It is likely that in
one or more future quarters our results may fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Common Stock would likely be seriously harmed.

RISKS ASSOCIATED WITH NEW PRODUCT OFFERINGS

        For the three and nine month periods ended October 31, 1999
approximately 88% and 84%, respectively, of our online revenues were derived
from sales of books. We recently expanded our product offerings to include
technology based training materials and corporate documentation, and future
revenues from these new product offerings are difficult to forecast. We also
expanded our focus to include resource materials for professionals in the
engineering, science, mathematics and financial services industries, and future
revenues from these new areas are difficult to forecast.

        We may choose to further expand our operations by promoting new or
complementary products and expanding the breadth and depth of products and
services offered. In addition, we may decide to utilize third-party
relationships to extend our brand or establish additional co-branded online
stores. We may pursue the acquisition of new or complementary businesses,
products or technologies. However, we have no present commitments or agreements
for any material acquisitions or investments. We may not be able to expand our
product offerings and related operations in a cost-effective or timely manner.
Such efforts may fail to increase online traffic and purchases from our online
or physical retail stores or to increase our overall market acceptance.
Furthermore, any new business or online store launched by us that is not
favorably received by individuals, corporate customers or their employees or
constituents could damage our reputation or the Fatbrain.com brand. Expansion of
our operations in this manner would also require significant additional expenses
and development, operations and editorial resources. Such efforts may strain our
management, financial and operational resources. The lack of market acceptance
of such efforts (including our recent expansion of product offerings to include
technology based training materials and corporate documentation as well as our
expanded focus in new industries) or our inability to generate satisfactory
revenues from such expanded services or products to offset related increased
costs could seriously harm our business, financial condition, results of
operations, and cash flows.

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS

        We recently introduced eMatter, a secure digital publishing channel to
allow authors and publishers to publish and sell works online. Future revenues
from this new business area are difficult to forecast. Further, the development
and expansion of eMatter require additional expenses and the diversion of
resources. The lack of market acceptance for eMatter or our inability to
generate satisfactory revenues from eMatter to offset related increased costs
could seriously harm our business, financial condition, results of operations,
and cash flows.

COMPETITION

        The electronic commerce is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. The electronic publishing market is also new and rapidly
evolving. We expect competition to continue to intensify in the future. We
currently or potentially compete with a variety of companies. These competitors
include:

          -    A significant number of traditional retail and online bookstores,
               including Amazon.com, Barnesandnoble.com, Borders Group, Inc. and
               other vendors of books, training products and product manuals;
          -    eMatter competition including 1stBooks, Books24x7, iUniverse.com,
               netLibrary, PublishOne and a variety of self-publishing and
               e-publishing sites;
          -    Various computer super-stores that carry related technical
               information resources at retail locations, in catalogs and over
               the Internet;
          -    A number of indirect competitors that specialize in electronic
               commerce or derive a substantial portion of their revenue from
               electronic commerce; and


                                       15
<PAGE>   16

          -    Other companies with substantial customer bases in the computer
               and other technical and professional fields.

        We may not be able to maintain a competitive position against current or
future competitors as they enter the markets in which we compete. This is true
particularly with respect to competitors with greater financial, marketing,
service, support, technical and other resources than Fatbrain.com. Our failure
to maintain a competitive position within the market could seriously harm our
business, financial condition, results of operations, and cash flows.

        We believe that the principal competitive factors on which we compete in
our market include:

          -    Brand recognition;
          -    Selection;
          -    Personalized services;
          -    Convenience;
          -    Price;
          -    Accessibility;
          -    Customer service;
          -    Quality of search tools;
          -    Quality of editorial and other site content; and
          -    Reliability and speed of fulfillment.

        Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than Fatbrain.com. In addition,
online retailers may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
our competitors may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than we can.

        Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. We may from time to time make
certain pricing, service or marketing decisions or acquisitions as a strategic
response to changes in the competitive environment. Such actions could result in
reduced margins or otherwise seriously harm our business, financial condition,
results of operations, and cash flows.

        New technologies and the expansion of existing technologies may increase
the competitive pressure we experience. For example, applications that select
specific titles from a variety of Web sites may channel customers to online
booksellers that are our competitors. Companies that control access to
transactions through a network or Web browsers could also promote our
competitors or charge us a substantial fee for inclusion. In addition, vendors
of information resources such as technology based training materials could
provide direct access to training programs online. We may be unable to compete
successfully against current and future competitors, and competitive pressures
faced by us could seriously harm our business, financial condition, results of
operations, and cash flows.

MANAGEMENT OF EXPANDING BUSINESS; LIMITED SENIOR MANAGEMENT RESOURCES

        We have rapidly expanded our operations, and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. Specifically, we expect to significantly increase our
direct corporate and telesales organization and marketing initiatives. This
expansion has placed, and future expansion is expected to place, a significant
strain on our management, operational and financial resources. In addition, the
introduction and development of eMatter is anticipated to divert management
attention and resources.

        Our new employees include a number of key managerial, technical and
operations personnel who have not yet been fully integrated into the Company,
and we expect to add additional key personnel in the near future. To manage the
expected growth of our operations and personnel, we will need to improve
existing and implement new transaction-processing, operational and financial
systems, procedures and controls. In addition, we will need to


                                       16
<PAGE>   17




expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. Our management will be
required to maintain and expand our relationships with:

          -    Various suppliers;
          -    Freight companies;
          -    Other Web sites;
          -    Other Web service providers;
          -    Internet and other online service providers; and
          -    Other third parties necessary to our business.

        Our current and planned personnel, systems, procedures and controls may
be inadequate to support our future operations. Further, management may be
unable to attract, retain, motivate and manage required personnel or to
successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage growth effectively, our business,
financial condition, results of operations, and cash flows could be seriously
harmed.

RISKS ASSOCIATED WITH NEW BRAND

        We believe we must establish, maintain and enhance our "Fatbrain.com"
brand. We have only been operating under the "Fatbrain.com" name since the end
of March 1999. To attract and retain online users and to promote and maintain
our new brand, we may need to substantially increase our marketing expenditures
to create and maintain strong brand loyalty among our customers. Additionally,
customers may react negatively to our new brand. Our business could be adversely
affected if our customers react negatively, our marketing efforts are
unproductive or if we cannot increase our brand awareness and acceptance. If we
fail to promote and maintain our brand, or if we incur excessive expenses in an
attempt to do so, our business, results of operations, financial condition and
cash flows would be seriously harmed.

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS

        A key element of our strategy is to generate a high volume of traffic
on, and use of, our online store. Accordingly, the satisfactory performance,
reliability and availability of the online store, transaction-processing systems
and network infrastructure are critical to our reputation. These factors are
similarly critical to our ability to attract and retain customers and maintain
adequate service and customer support levels. Our revenues depend on the number
of visitors who shop at our online store and the volume of orders we fulfill.
Any system interruptions that cause our online store to be unavailable or impair
order fulfillment performance would reduce the volume of goods sold and the
attractiveness of our product and service offerings. We have experienced
periodic system interruptions, which we believe will continue to occur from time
to time. If there is a substantial increase in the volume of traffic on our
online store or the number of orders placed by customers we will need to expand
and further upgrade our technology, transaction-processing systems and network
infrastructure. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our online store or timely expand and upgrade
our systems and infrastructure to accommodate such increases.

        We use an internally developed system, which is supplemented by
commercially available licensed technology, for:

          -    Our online store;
          -    Search engine;
          -    Our secure digital publising channel for eMatter; and
          -    Substantially all aspects of transaction processing, including
               order management, cash and credit card processing, purchasing,
               inventory management and shipping.

        We intend to upgrade and expand our transaction-processing systems and
to integrate newly developed and purchased modules with our existing systems in
order to improve our accounting, control and reporting methods and support
increased transaction volume. We may be unable to add additional software and
hardware or to develop and further upgrade our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic through our online store or increased sales volume. Any
inability to do so may result in:

                                       17
<PAGE>   18

          -    Unanticipated system disruptions;
          -    Slower response times;
          -    Degradation in levels of customer service;
          -    Impaired quality and speed of order fulfillment; and
          -    Delays in reporting accurate financial information.

        We may be unable in a timely manner to effectively upgrade and expand
our transaction-processing system or to smoothly integrate any newly developed
or purchased modules with our existing systems. Any inability to do so could
seriously harm our business, financial condition, results of operations, and
cash flows.

NEED FOR ADDITIONAL PERSONNEL

        Our future success depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, particularly in the San Francisco Bay Area, where our headquarters are
located. As a result, we may be unable to successfully attract, assimilate or
retain qualified personnel. We have encountered difficulties in attracting a
sufficient number of qualified software developers for our online store and
transaction-processing systems. Further, we may be unable to retain those
developers we currently employ or attract additional developers. The failure to
retain and attract the necessary personnel could seriously harm our business,
financial condition, results of operations, and cash flows.

SALES AND OTHER TAX COLLECTION

        We do not currently collect sales or other similar taxes in respect of
shipments of goods into states other than California and Kentucky. However, one
or more states or foreign countries may seek to impose sales tax collection
obligations on out-of-state or foreign companies which engage in electronic
commerce. In addition, any new operations we establish in states outside
California and Kentucky could subject shipments into such states to state sales
taxes. A successful assertion by one or more states or any foreign country that
we should collect sales or other similar taxes on the sale of merchandise could
seriously harm our business, financial condition, results of operations, and
cash flows.

RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE

        Our success, in particular our ability to successfully receive and
fulfill online orders and provide high-quality customer service, largely depends
on the efficient and uninterrupted operation of our computer and communications
hardware systems. Substantially all of our computer and communications hardware
is currently located at a single leased facility in Santa Clara, California. Our
systems and operations are vulnerable to damage or interruption from a number of
sources, including:

          -    Fire;
          -    Flood;
          -    Power loss;
          -    Telecommunications failure;
          -    Break-ins; and
          -    Earthquake and similar events.

        We have experienced minor and infrequent system interruptions in the
past. We do not presently have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur. Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. Such disruptions could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing risks could seriously harm our business, financial condition,
results of operations, and cash flows.

RELIANCE ON CERTAIN SUPPLIERS


                                       18
<PAGE>   19





        For the three and nine months ended October 31, 1999, we purchased
approximately 34% and 36%, respectively, of our products from Ingram Book
Company ("Ingram") and 19% and 18%, respectively, of our products from Pearson
Education Division. We rely to a large extent on rapid fulfillment from Ingram
and other vendors. We generally have no commitments to or arrangements with any
of our vendors that guarantee the availability of merchandise, the continuation
of particular payment terms or the extension of credit limits. Our current
vendors may not continue to sell merchandise to us on current terms. In
addition, we may be unable to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If we were unable to develop and
maintain relationships with vendors that would allow us to obtain sufficient
quantities of merchandise on acceptable commercial terms, our business,
financial condition, results of operations, and cash flows would be seriously
harmed.

DEPENDENCE ON KEY PERSONNEL

        Our performance is substantially dependent on the continued services and
on the performance of our senior management and other key personnel. Our
performance also depends on our ability to retain and motivate our senior
management and other key employees. The loss of the services of any of our
executive officers or other key employees could seriously harm our business,
financial condition, results of operations, and cash flows.

        We have entered into employment agreements with several members of our
senior management, including:

          -    Mr. MacAskill, our President and Chief Executive Officer;
          -    Mr. Orumchian, our Vice President of Engineering;
          -    Mr. Alvarez, our Vice President of Finance and Chief Financial
               Officer; and
          -    Mr. Capovilla, our Vice President of Sales and Business
               Development

        Each employment agreement sets forth the officer's base salary and
general employee benefits, including acceleration of a portion of such
employee's Common Stock option vesting. We maintain $2.0 million of key person
life insurance on Chris MacAskill, our President and Chief Executive Officer.

DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE

        Our future revenues and profits, if any, substantially depend upon the
acceptance and use of the Internet and other online services as an effective
medium of commerce by our target customers. Rapid growth in the use of and
interest in the Internet, the Web and online services is a recent phenomenon. As
a result, acceptance and use may not continue to develop at historical rates and
a sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. Our target customer has historically used traditional means of
commerce to purchase information resources. For us to be successful, these
customers must accept and utilize our online store to satisfy their information
resource needs.

        In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of the
Internet generally and Fatbrain.com in particular. Our business, financial
condition, results of operations, and cash flows would be seriously harmed if:

          -    Use of the Internet and other online services does not continue
               to increase or increases more slowly than expected;


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<PAGE>   20

          -    The infrastructure for the Internet and other online services
               does not effectively support expansion that may occur; or
          -    The Internet and other online services do not become a viable
               commercial marketplace.

RAPID TECHNOLOGICAL CHANGE

        To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online operations. The
Internet and the electronic commerce industry are characterized by:

          -    Rapid technological change;
          -    Changes in user and customer requirements and preferences;
          -    Frequent new product and service introductions embodying new
               technologies; and
          -    The emergence of new industry standards and practices.

        The evolving nature of the Internet could render our existing online
store and proprietary technology and systems obsolete. Our success will depend,
in part, on our ability to:

          -    License leading technologies useful in our business;
          -    Enhance our existing services;
          -    Develop new services and technology that address the increasingly
               sophisticated and varied needs of our current and prospective
               customers; and
          -    Respond to technological advances and emerging industry standards
               and practices on a cost-effective and timely basis.

        The development of our Web site and other proprietary technology entails
significant technical and business risks. We may not successfully use new
technologies effectively or adapt our online store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner, in response to changing market conditions or
customer requirements, our business, financial condition, results of operations,
and cash flows could be seriously harmed.

ELECTRONIC COMMERCE SECURITY RISKS

        A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, such as customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the algorithms
used by us to protect customer transaction data. If any such compromise of our
security were to occur, it could seriously harm our reputation, business,
financial condition, results of operations, and cash flows. A party who is able
to circumvent our security measures could misappropriate proprietary information
or cause interruptions in our operations.

        We may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
our activities or those of third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent such security breaches may seriously
harm our business, financial condition, results of operations, and cash flows.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

        For the three and nine months ended October 31, 1999, international
sales accounted for approximately 11% and 13%, respectively, of our online
revenue. We expect that our percentage of online revenue from


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<PAGE>   21





international markets will continue to represent a significant portion of our
total revenue. Our international business activities are subject to a variety of
potential risks, including the adoption of laws, political and economic
conditions and actions by third parties that would restrict or eliminate our
ability to do business in certain jurisdictions. Although we currently transact
business in U.S. dollars, to the extent that we determine to transact business
in foreign currencies, we will become subject to the risks attendant to
transacting in foreign currencies, including potential adverse effects of
exchange rate fluctuations.

YEAR 2000 COMPLIANCE

        Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and cannot
distinguish dates in the 1900's from dates in the 2000's. This could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although we believe that our products
and internal systems are Year 2000 compliant, we utilize third-party equipment
and software that may not be Year 2000 compliant. Failure of such third-party
equipment or software to operate properly with regard to the Year 2000 and
thereafter could require us to incur unanticipated expenses to remedy any
problems, which could seriously harm our business, results of operations,
financial condition and cash flows.

        Any failure to make our products Year 2000 compliant could result in:

          -    A decrease in sales of our products;
          -    An increase in the allocation of resources to address Year 2000
               problems of our customers without additional revenue commensurate
               with such dedication of resources; and
          -    An increase in litigation costs relating to losses suffered by
               our customers due to such Year 2000 problems.

        Furthermore, the purchasing patterns of customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products and services such as
those offered by us, which could seriously harm our business, financial
condition, results of operations and cash flows. We have conducted a review of
our internal computer systems to identify the systems that could be affected by
the Year 2000 issue and to develop a plan to resolve the issue. Based on this
review, we have upgraded our systems to versions which are Year 2000 compliant
and we currently have no reason to believe that our internal software systems
are not Year 2000 compliant. However, we will continue to evaluate our systems
and in the event we conclude that our systems are not Year 2000 compliant, we
will develop a contingency plan to address these issues. There can be no
assurance that Year 2000 compliance issues will not have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS AND MATERIALS

        We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. Further,
we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers, partners
and others to protect our proprietary rights. We pursue the registration of our
trademarks and service marks in the U.S. and internationally, and have applied
for the registration of certain of our trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our products and services are made available
online. While we attempt to ensure that the quality of our brand is maintained
by such licensees, such licensees may take actions that could seriously harm the
value of our proprietary rights or reputation and in turn our business,
financial condition, results of operations, and cash flows. The steps we have
taken to protect our proprietary rights may not be adequate and third parties
may infringe or misappropriate our copyrights, trademarks, trade dress and
similar proprietary rights.

        In addition, other parties may assert infringement claims against us.
Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. We are not currently aware of
any


                                       21
<PAGE>   22


legal proceedings pending or threatened against us. In addition, we display
reviews and articles on technical subjects in our online store. Some reviews and
articles may be copyrighted and we may not have explicit permission from the
author for use of such intellectual property. The authors may assert
infringement claims against us. If a claim is asserted alleging that we have
infringed the proprietary rights of a third party, we may be required to seek
licenses to continue to use such intellectual property. The failure to obtain
the necessary licenses or other rights at a reasonable cost could seriously harm
our business, financial condition, results of operations, and cash flows.

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES

        We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to:

          -    User privacy;
          -    Pricing;
          -    Content;
          -    Copyrights;
          -    Distribution; and
          -    Characteristics and quality of products and services.

        Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the expansion of the
Internet. A decline in the growth of the Internet could decrease demand for our
products and services and increase our cost of doing business, or otherwise
seriously harm our business, financial condition, results of operations, and
cash flows. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our
business, financial condition, results of operations, and cash flows could be
seriously harmed by:

          -    Any such new legislation or regulation;
          -    The application of laws and regulations from jurisdictions whose
               laws do not currently apply to our business; or
          -    The application of existing laws and regulations to the Internet
               and other online services.

        As our service is offered over the Internet in multiple states and
foreign countries, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each such state and foreign country.
The failure by us to qualify as a foreign corporation in a jurisdiction where it
is required to do so could subject us to taxes and penalties for the failure to
qualify. It is possible that the governments of other states and foreign
countries also might attempt to regulate the content of our online store or
prosecute us for violations of their laws. Violations of local laws may be
alleged or charged by state or foreign governments. Further, we might
unintentionally violate such laws and such laws may be modified and new laws may
be enacted in the future.

        In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
The growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet use have
begun to experience interruptions in phone service. As a result, local exchange
carriers have petitioned the FCC to regulate Internet Service Providers ("ISPs")
in a manner similar to long distance telephone carriers and to impose access
fees on the ISPs. If any effort to increase regulation of ISPs is successful,
the expense of communicating on the Internet could increase substantially,
potentially slowing the growth in the use of the Internet. Any such new
legislation or regulation or application or interpretation of existing laws
could seriously harm our business, financial condition, results of operations,
and cash flows.

POSSIBLE VOLATILITY OF STOCK PRICE


                                       22
<PAGE>   23


        The trading price of our Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in price in response to such factors
as:

          -    Actual or anticipated variations in quarterly operating results;
          -    Announcements of technological innovations;
          -    New sales formats or new products or services by us or our
               competitors;
          -    Changes in financial estimates by securities analysts;
          -    Conditions or trends in the Internet and electronic commerce
               industries;
          -    Changes in the market valuations of other Internet, online
               service or retail companies;
          -    Announcements by us of significant acquisitions, strategic
               partnerships, joint ventures or capital commitments;
          -    Additions or departures of key personnel;
          -    Sales of Common Stock; and
          -    Other events or factors, many of which are beyond our control.

        In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. These
trading prices and price earnings ratios may not be sustained. These broad
market and industry factors may seriously harm the market price of the Common
Stock, regardless of our operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would seriously harm our business,
financial condition, results of operations, and cash flows.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW

        Our Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be seriously harmed by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
seriously harm the voting and other rights of the holders of Common Stock. We
have no present plans to issue shares of Preferred Stock. Further, certain
provisions of our Second Amended and Restated Certificate of Incorporation and
Delaware law could delay or make more difficult a merger, tender offer or proxy
contest involving the Company.


                                       23
<PAGE>   24

<TABLE>
<CAPTION>
<S>            <C>
PART II.       OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS.

               None

ITEM 2.        CHANGES IN SECURITIES AND USE OF PROCEEDS.

               Not applicable

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES.

               Not applicable

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

               Not applicable.

ITEM 5.        OTHER INFORMATION.

               Not applicable

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K.

               (a) The following exhibit is filed as part of this report:

                   27.01 - Financial Data Schedule

               (b) Reports on Form 8-K

                   No Reports on Form 8-K were filed during the three months
                   ended October 31, 1999.
</TABLE>


                                       24
<PAGE>   25


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

December 14, 1999            FATBRAIN.COM, INC.
                             (Registrant)

                             By:          /s/ Donald P. Alvarez
                                ----------------------------------------
                                 Donald P. Alvarez
                                 Vice President of Finance and Administration
                                 and Chief Financial Officer (Duly Authorized
                                 Officer and Principal Financial Officer)


                                       25
<PAGE>   26
                                 EXHIBIT INDEX





                     Exhibit No.       Document Description
                     -----------      -----------------------

                        27.1          Financial Data Schedule